Brokerages Expect RBI to Cut Rate in October, Achieve CPI Inflation Target by March
The Reserve Bank of India maintained status-quo on the repo rate in what was Raghuram Rajan’s last monetary policy review as the Governor of RBI.
As many as three brokerages, out of six studied by BloombergQuint, believe that the Reserve Bank of India could cut repo rate as early as October.
They expect the central bank to meet its 5 percent target by March 2017, according to their post policy notes.
The RBI on Tuesday maintained status-quo on the repo rate in Raghuram Rajan’s last monetary policy review as RBI governor. The central bank said its policy stance was accommodative but flagged off upside risks to inflation.
Here’s what various brokerages had to say about Tuesday’s monetary policy review.
Bank of America-Merrill Lynch
The global financial major expresses disappointment over the RBI’s status quo but welcomes the resumption of open market operations, the brokerage said in a post policy note.
Going forward, it expects a 25 basis point (1 basis point = 0.01 percent) cut in October, and an overall 50 basis point cut by March 2017. BofA-ML forecasts July CPI inflation to hit 6 percent and lower to 5.1 percent by March, the note added.
The brokerage points to three compelling reasons why RBI should have cut policy rates in this review:
- Good monsoons is pulling down agflation and inflation
- High lending rates are delaying the recovery
- It would’ve been easier for banks to transmit a rate cut signal into lending rate cuts now than in October.
HSBC
Monsoon, members of the monetary policy committee and the next RBI governor are three key factors that will determine the Reserve Bank’s future course of action, HSBC says in a report published after the central bank’s policy review.
It expects a 25 basis point rate cut in the fourth quarter if rainfall is abundant and food prices see a steep correction. Fresh supplies of vegetables and pulses will lower CPI inflation to RBI’s target of 5 percent by early 2017, according to HSBC’s estimates.
HSBC also expects India to clock in a growth of 7.4 percent in financial year 2016-17 as compared to RBI’s projection of 7.6 percent, the report adds.
Nomura
Underlying inflation will remain sticky at 5-5.5 percent, citing an increase in consumption, good monsoons and pay hikes resulting from the Seventh Pay Commission, Nomura says in a report dated August 9.
The brokerage sees no room for any policy accommodation but believes the policy stance will be guided by the members of the monetary policy committee and the new RBI governor.
Like BofA ML and HSBC, Nomura too expects a 25 basis point rate cut in October.
Citi
The last monetary policy statement by Governor Rajan was status quo on interest rates but still accommodative at the margin, says Citi in its post policy report.
The brokerage says RBI may not have enough room to ease interest rates in the near term with consumer price index inflation very close to the RBI’s target band.
The Reserve Bank of India will aim to keep consumer price inflation at four percent through 2021, while allowing the rate to fluctuate in a 2 percent to 6 percent band, the government said in a statement on Friday.
Some easing space might still open up as “visibility improves on RBI meeting its 5 percent inflation target in early 2017, and once the FCNR related event risk is behind,” according to the Citi report.
The constitution of the monetary policy committee and the new RBI governor will also determine the policy stance, the brokerage adds.
Edelweiss
Retail inflation may ease towards 5 percent or lower over the next three to six months, Edelweiss said in a report published after the announcement of the central bank’s policy. Based on this forecast, the brokerage sees a scope for RBI to ease the repo rate by 50 basis points over the rest of financial year 2016-17.
The RBI refrained from easing interest rate in this policy as the current inflation rate is very close to the central bank’s inflation target range (4% +/-2%), the brokerage says.
It will be critical to watch is how the monetary policy committee interprets the CPI target range and if they stick to the 5 percent target by January 2017, Edelweiss adds.
CRISIL
A 50 basis point cut in repo rate cut could come as early as the next policy in October, rating agency CRISIL says in a post policy note. Depending on a good monsoon, CRISIL expects GDP growth to rise to 7.9 percent and retail inflation to hover around 5 percent, on an average, by March.